by Eugenio Micheletti (*) for staffingamericalatina

An old constraint appeared again.  Inflation rate in US is around 7% annually, and developed economies are not accustomed to deal with it.   Then, companies and advisors have to dust old recipes off.

From a financial perspective, inflation impacts the key variables of the business, challenges the collection and payment processes, and hampers to plan in the short and mid-term.

That being said is crucial to understand the dynamics of this phenomenon, so we can anticipate negative effects and avoid loss of company value.

Regarding the income statements, salaries, as the main direct costs, will be raising; not only because the inflation, but the lack of talent is pushing towards that increase.  Others direct and indirect costs will do so, stressing the gross and operating profits.  If gross and operating margins changed, it is important to identify the real causes, because inflation is one of them, so we have to measure and weight each of them.

Finally, inflation makes the interest rate to raise too, then working capital increases and becomes more expensive.

Concerning the balance sheet, we can expect delays in collecting and payment processes, consequently Trade Receivables and Payables change.  It is crucial to evaluate Debtors’ behaviour, strengthen collection process and make decisions in payment process, in order to avoid huge increases in Working Capital.

The senior management of companies would sense that inflation, ultimately, impacts the company valuation, and have to be included in the strategic planning, commercial goals, financial reports, human capital policies, budget and forecasts.

For example, it is important to differentiate the growth coming from more clients and increase of sales, than that coming from inflation.   Regarding costs (direct and indirect) movements, similar distinction is very useful.

As you can see, core business is not on risk because of inflation, but an accurate assessment in this respect could help companies to improve decision making process, and prevent losses in company value.

(*) Eugenio Micheletti is Emerging Staffing Brokers’ Director – emicheletti@emergingsb.com